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Supplemental Statement Emphasizes Limits of DOL’s 2020 Letter on Private Equity Investments


· 5 minute read


· 5 minute read

U.S. Department of Labor Supplemental Statement on Private Equity in Defined Contribution Plan Designated Investment Alternatives (Dec. 21, 2021); DOL News Release 21-2132-NAT (Dec. 21, 2021)


News Release

The DOL has issued a statement that supplements its 2020 information letter regarding designated investment alternatives with a private equity component (see our Checkpoint article). The 2020 letter responded to concerns raised by large plan sponsors with experience handling private equity investments in defined benefit plans. Those sponsors had asked whether offering a professionally managed asset allocation fund with a private equity component in an individual account plan (such as a 401(k) plan) would necessarily violate ERISA. The 2020 letter concluded that individual account plan fiduciaries would not violate their fiduciary duties solely by reason of offering such investments, but it cautioned fiduciaries regarding the unique risks of private equity investments and outlined issues that fiduciaries would need to address. After the 2020 letter was issued, stakeholders expressed concerns about the letter and how it was being interpreted. The SEC also issued an alert highlighting compliance issues it had encountered when examining private equity and hedge fund investments. These concerns led the DOL to clarify the 2020 letter’s limits in a supplemental statement.

The supplemental statement reminds fiduciaries, especially fiduciaries of small plans, about the context of the 2020 letter and cautions them not to misread the letter as saying that funds with private equity investments are generally appropriate for a typical 401(k) plan. The statement agrees that the representations in the 2020 letter regarding the benefits of private equity investments were not tempered by contrary data and counterarguments from independent sources. The statement also notes concerns regarding the adequacy of investment disclosures for private equity investments, the consequences when participants liquidate or transfer private equity investments, and the inability of many 401(k) plan sponsors and fiduciaries to conduct the analysis outlined in the 2020 letter when selecting or monitoring private equity as a component of a designated investment alternative. Given these concerns, the statement cautions against applying the 2020 letter outside of its original context and generally discourages the use of private equity investments in small, individual account plans.

EBIA Comment: The DOL’s supplemental statement does not alter the basic message of the 2020 letter: Some fiduciaries, in some circumstances, can offer a professionally managed asset allocation fund with a private equity component without violating their ERISA fiduciary duties. But that possibility should not be overstated. The complexity, cost, reduced liquidity, and compliance demands associated with private equity investments make them inappropriate for most plans. The supplemental statement highlights these obstacles and cautions fiduciaries who are asked to consider funds with a private equity component that such investments will seldom be a viable option, especially if those fiduciaries lack experience with such investments. For more information, see EBIA’s 401(k) Plans manual at Sections XXV.D (“Selecting the Plan’s Investment Funds”) and XXVI.B (“Limiting Fiduciary Exposure Through ERISA § 404(c) Protection”).

Contributing Authors: EBIA Staff.

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